Microsoft stock drops after results fall short in latest AI disappointment

Microsoft released its fiscal fourth-quarter earnings, showing a mixed performance. The company beat expectations on both earnings per share (EPS) and total revenue but missed projections for its cloud revenue. Specifically, Microsoft reported an EPS of $2.95 on revenue of $64.7 billion, slightly above Wall Street’s expectations of $2.94 EPS on $64.5 billion in revenue. Compared to the same quarter last year, Microsoft showed notable growth, up from $2.69 EPS and $56.2 billion in revenue.

However, the company’s cloud segment, which is critical for its future growth, didn't fully meet analysts' forecasts. While overall cloud revenue was $36.8 billion, matching expectations, the Intelligent Cloud segment, including Azure services, fell short at $28.5 billion versus the anticipated $28.7 billion. Despite this, Microsoft's cloud revenue still grew by 21% year-over-year, and Intelligent Cloud revenue increased by 19%.

Interestingly, AI services contributed significantly to Azure's growth, adding 8 percentage points and resulting in a 29% increase in Azure and other cloud services revenue. This performance, however, didn’t prevent a negative market reaction, with Microsoft shares dropping about 2% in pre-market trading and having fallen more than 7% earlier.

The earnings report also impacted other AI-centric companies, with Meta's shares declining over 3% in after-hours trading. This comes in the wake of Alphabet's recent earnings announcement, which noted increased cloud revenue driven by AI but lacked specific AI-related financial figures, leading to some skepticism about immediate revenue benefits.

Analysts have observed that Microsoft is gaining market share from competitors like Google and Amazon in the cloud space, particularly due to its strong position in AI. This trend has been consistent over the past 6-12 months, as noted by UBS analyst Karl Keirstead. Alphabet, meanwhile, continues to invest heavily in AI, with CFO Ruth Porat indicating that the majority of their $13 billion in capital expenditures this quarter went towards AI initiatives.

For a more detailed breakdown, you can read the full report here.

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